Trade and investment relations between the EU and RI

Trade and investment relations between the EU and RI

The European Union is the world's largest trade entity. Its trading activities account for more than one-fifth of total world trade in goods. EU exports to the rest of the world form a vital source of its income, representing 9% of the Union's gross domestic product (GDP).

EU imports correspond to 21% of the world total and 10% of its GDP. The European Single Market is an open one, with an average import tariff for industrial products that will be as low as 3.8% once the new GATT is fully implemented.

Trade between Indonesia and the European Union as well as European investments in Indonesia have steadily increased over the past years.

The European Union is Indonesia's second largest trading partner after Japan, but well ahead of the United States. According to trade figures of the European Statistical office, Indonesia maintains a trade surplus with the European Union. The share of manufactured products continues to be a larger share of Indonesia's exports to the Union. Indeed during the period 1990- 1993 Indonesia exported more manufactured products to Europe than to any other market in the world.

With a total foreign investment of US$22.6 billion, the countries of the European Union were the largest investors in Indonesia during the period 1967-1994.

Trade

The geographical pattern of Indonesia's trade has remained quite stable in recent years, the bulk of it being with other Asian countries, which absorb about two-thirds of Indonesia's exports and supply about half of its imports. In 1992, the European Union overtook Japan in trading manufactured goods with Indonesia.

Japan remains nevertheless the single most important trade partner of Indonesia, due to its large imports of oil and gas. The European Union ranks second, far ahead of the United States. The European Union doubled its share in Indonesia's total exports from 7.5 % in 1985 to 15 % in 1992. During the same period, imports from Europe rose from 16 % to over 23 % of Indonesia's total imports.

Indonesia is a traditional supplier of agricultural commodities, such as crude rubber, vegetable oils and fats, cork and wood manufactures, for which it still holds a substantial share of European imports.

The composition of Indonesian exports to the EU recorded 68% of manufactured products in 1993 as compared to 56 % in 1990. Over the past years, Indonesian exports of labor-intensive manufactured goods such as textiles, clothing, furniture and footwear have been growing fast, and the Indonesian share of the EU total imports of these products is now significant.

The most outstanding example in this respect are textiles and garments, which represented 30 % of Indonesian exports to the European Union in 1993. Indonesia is now ranking fifth among the EU's suppliers for these products; it was only 13th in 1987. The tariff preferences granted by the European Union under the GSP have greatly contributed to the increase of Indonesia's exports to the EU.

In 1993, exports worth 2.4 billion ECU benefited from the GSP and Indonesia was the third single beneficiary country of the European GSP after China and India. Important improvements focusing on development aspects have been introduced under the new GSP, adopted by the European Union in late 1994. The most important reform is that GSP preferences will no longer be subject to quantitative restrictions.

The composition of European exports has remained rather stable over the last decade, the bulk being technologically advanced, capital-intensive products such as machinery and chemicals. In 1993, 85% of European exports to Indonesia concerned manufactured products.

The recent trade pattern shows that both sides are making extensive use of their comparative advantages. As a result, trade between the European Union and Indonesia has steadily increased. Two-way trade grew an impressive 17% per year, from 5.7 billion ECU in 1990 to 9.1 billion ECU in 1993.

European Investments in Indonesia

Over the period 1967-1994, the member states of the European Union were the largest investors in Indonesia, their approved investments amounting to US$22.6 billion. This figure represents 24 % of total foreign investment approvals, well above investments from Japan (20 %), U.S. (9 %), Hong Kong, Taiwan, Singapore and Korea.

Whereas the Asian countries largely invest in labor-intensive export industries like garments and footwear, European investments have been concentrating on capital-intensive enterprises that supply the domestic market, such as food, paper, chemicals, and non-metallic mineral industries. However, the latest figures show that Europe has lost some ground but every effort is being made to reverse that trend.

An important role in promoting European investments in Indonesia has been played by the European Community Investment Partner (ECIP), which has provided soft financing to 60 joint- ventures in the manufacturing sector. Indonesia is one of the major beneficiaries of the ECIP in the world, which provides financing, training and support for feasibility studies.